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Could the Currency War Ignite the Trade War?

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Currency war

We have seen a sell-off in emerging market currencies in 2018. Earlier in the year, President Trump authorized doubling the Section 232 tariffs on Turkey after the country’s currency fell. Weak domestic currencies make a country’s exports competitive in the global market. Previously, President Trump wanted to call China a “currency manipulator.” Since he took office, President Trump has backed off.

Trade war

Amid the US-China trade spat, we’ve seen a fall in the Chinese currency. According to Reuters, “China’s central bank on Tuesday fixed its yuan at 6.9019 per dollar, so breaching the 6.9000 barrier and leading speculators to push the dollar up to 6.9320 in the spot market.” India’s currency has also fallen against the US dollar in 2018. The country that has taken strong measures in the past to prevent its currency from sliding. However, India hasn’t shown the same sense of urgency this time.

Tariffs

Depreciating currencies would help countries blunt some of the impacts from President Trump’s tariffs. However, the currency war could ignite the trade war. For US companies (SPY) like Ford (F) and Tesla (TSLA) that are paying tariffs on their exports to China (FXI), a stronger US dollar could impact their earnings. Commodities like copper (FCX) and aluminum also have a negative correlation with the US dollar.

Mining companies have looked apprehensive amid the US-China trade spat. The companies have preferred to return capital to shareholders rather than investing in their business. Read What Mining Companies’ Buybacks Tell Us about the Economy to learn more.

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